Someone didn’t get the memo about regulatory capture

So there’s this guy named Benjamin Lawsky, and he’s the New York State Superintendent of Financial Services. Last week he blew open a case against a British bank named Standard Chartered for money laundering and doing business with Iran.

The other regulators don’t like his style one bit, even though he managed to force Standard Chartered to pay $340 million for their misdeeds, as well as look like bad guys. I’ll get back to why the other regulators are pissed but first a bit more on the settlement.

What’s not cool about a fine is that nobody goes to jail and they continue business as usual, hopefully without the money laundering (their stock has mostly recovered as well).

What is cool about the $340 million fine is that it took almost no time compared to other settlements with banks (a nine month investigation before the blowup last week) and that it’s actually pretty big – bigger, for example, then the proposed settlement SEC is making with Citigroup which judge Rackoff blocked for shorting their clients in 2008 and not admitting wrongdoing.

In this case of Standard Chartered, they may not be admitting wrongdoing but we’ve all already read the evidence, as well as the smoking gun email:

The business chugged along even after the banking unit’s chief executive in the Americas warned in a 2006 memo that the company and its management might be vulnerable to “catastrophic reputational damage” and “serious criminal liability.”

According to the regulatory order, a bank official in London replied: “You f- Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians.”

[Aside: do you think, being a polite Brit, that this guy actually wrote “f-” in his email?]

Back to the other regulators. They are so used to working for the banks, it is inconceivable to them to publicize damning evidence before giving the heads up to the bank in question looking for a quiet settlement. That’s the way they do things. And then they never get much money, and nobody ever goes to jail. Oh, and it takes forever.

They argue that this is because they don’t have enough resources to go the distance with lawyers, but it’s also because their approach is so weak.

So naturally they’ve been pretty upset that Lawsky has balls when they don’t, especially since he doesn’t have nearly the resources that the SEC has.

My favorite ridiculous argument against Lawsky and his approach came from this article I read yesterday on Reuters. It stipulates that Lawsky is creating an environment where there’s a possibility of regulatory arbitrage. From the article:

But a central lesson of the financial crisis was the need for regulators to better cooperate and share information. Working at cross purposes creates opportunities for what’s known as “regulatory arbitrage,” whereby banks circumvent regulations by exploiting rivalries among their various overseers.

Um, what? That whole mindset is clearly off.

The goal would be the regulators get to decide who’s the bad guy, not the banks. And don’t tell me loopholes in the regulatory structure are introduced by having a regulator willing to do his job without sucking everybody’s dick first. Please.

And if I’m a regulator, and if it would work better to share my information with Lawsky to do my job as a regulator, you better believe I’m willing to share it with him if I can get credit alongside him for exposing illegal activities. That is, if I really want to expose illegal activities.

“Working at cross purposes creates opportunities for what’s known as “regulatory arbitrage,” whereby banks circumvent regulations by exploiting rivalries among their various overseers.”

In fact regulatory agencies do have competing and conflicting interests, This is by design on a national level.. On a national (US ) level the arbitrage opportunities for a US financial institution is limited. GS and MS resisted the temptation to become Bank Holding Companies in order to exploit existing US regulatory arb opportuniites available to Invesment Banks vs BHC until that arb opportunity disappeared in 2008. Their 2008 choice was exile (and certain death) or BHC status, with its attendant benefits, (i.e access to the Fed discount window to fund its prop trading business vs going it alone with an AIG failure to guarantee its portfolio.. The local reg arb opportunity disappeared with the AIG failure.

Another , more global interpretation of the anodyne Reuters observation:

“Working at cross purposes creates opportunities for what’s known as “regulatory arbitrage,” whereby banks circumvent regulations by exploiting rivalries among their various overseers.”

Suggests that the Americans’s aren’t quite playing cricket with their Euro peers. London and NY have (till recently) had an unspoken agreement that they would each provide mutually beneficial international capital rules arbitrage opportunities to each other. (i.e London listing requirements were lighter touch, vs Euro issues could be sold to US investors under London Rules).

On top of that,US Bank Branch activities operating in London were effectively subject to London oversight rules (i.e jpms London Whale activity) . This is the essence of regulatory arbitrage. Conduct you least monitored, most risky activity in the least regulated financial district.

That’s what regulatory arbitrage is. There is no working at cross purposes here.

Capital rules differences between the US and EURzone was also a huge regulatory arb opportunity that was massively exploited by US (and Canadian) and Euro Banks pre -crisis.

Why is there hardly any criminal charges leveled?! Never! Only ‘fines’ by the ‘business’. What about other examples where there were charges – Worldcom, Enron, etc – people were held responsible. Why not in this – and similar- situation? It is infuriating.

The problem with settlements sans verdicts is that no one ever learns the truth. If the bank is guilty, maybe they made a easy settlement to placate the regulator while covering up further malfeasance. On the other hand, if the bank is not guilty, maybe they have been shaken down by an ambitious regulator. Judge Rakoff, as you read in the Times, is leading a charge to have real trials with real verdicts.